7.4
7.4.1
A tax efficient
or tax-managed mutual fund means that the published return
and the after-tax return should be similar since there is minimal taxable distributions from the fund.
Index funds can be tax-managed, in addition to the natural
advantages of low turnover in the index fund. Managers of tax-managed index funds employ
tax-managed trading strategies such as tax loss harvesting of stocks that large losses, while most managers of actively manage
funds have high turnover of their stocks and manage the fund as if taxes were not important to their performance. Since few investors adjust their returns by the taxes they pay on the fund, the active managers prefer not to worry about taxes. However, they can have a significant impact on your returns.
The charts below shows comparison between IFA Index Portfolios and IFA Index Portfolio for Taxable Accounts.
The names in the table below are links to fact sheets about each of these
Tax-Managed funds.
7.4.2
DFA offers
five tax-managed index fundsand their research
demonstrates that the increase in after-tax return associated with
these funds can vary from 1 to 1.5% per year. DFA has run simulations
with its tax-managed U.S. Market Wide Value Fund which show that if
the fund dropped 20% from its value, it could sell nearly 40% of its
assets without realizing any net capital gains.
Please remember that the financial services industry wants
you to trade a lot because trading is the primary source of
their income. We estimate about
$645 million, or about 5 cents/share
for buyers and sellers per day in the U.S. for commissions,
bid ask spread costs, market makers, the exchanges, etc. So
it is easy to understand why trading
has also been documented to be detrimental to YOUR income. |
7.5
There are many
silent partners eating a piece of investment returns. The best solution
to this problem is to buy and hold a diversified portfolio of index
funds, including tax managed funds in taxable accounts. For an example,
see Portfolio
90, for Taxable Accounts.
7.6
1. The only uncontrollable partner in investing is:
a) income tax.
b) inflation.
c) commissions.
d) margin account interest.
2. What is the difference between "realized" and "unrealized" gains?
a) taxable vs non-taxable
b) old money vs new money
c) fund based vs. investor based
d) none of the above
3. What are the advantages of low portfolio turnover?
a) lower taxes
b) fewer trading costs
c) maximum capital gain
d) all of the above
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